Though analysts slammed
on Friday morning after the boxmaker warned of slower sales growth, investors didn't need analysts to sense that something was awry.
A look at a chart showing where Dell typically trades in relation to analysts' earnings projections might have served investors just as well -- and sooner. (See our
related story on Dell's announcement.)
The chart below, from
MarketPlayer.com, displays Dell's stock price (black) against analysts' projections for the stock's earnings growth (red). Notice how in 1997 the stock's price began to deviate from its historical norms relative to its projected growth rate.
Dell Takes Off
Up until 1997, Dell traded very close to 15 times analysts' estimates of its annual earnings. Halfway through 1997, however, the stock began to move away from this range. That is, investors bid the price up much faster than analysts were boosting its earnings projections -- a telling indication of overvaluation. Over the past few months, as Dell has fallen, the lines have come together. (Fifteen times is a baseline reference point that MarketPlayer uses for all stock charts of this type.)
Ted Murphy, president of MarketPlayer.com, says there are several other stocks that look ripe for a fall on the same basis. He points to two stocks that, also in 1997, started trading far beyond their historical norms relative to analysts' growth estimates.
-- both in the storage arena -- "are extremely extended on their historical norms," Murphy says, adding that he "would look for a retrenchment over the next 12 months" in both stocks.
Murphy says that he would put
into this camp as well, even though it has already fallen this year from $82 to about $50. (Murphy does not have a position in any of the stocks mentioned.)
While Murphy sees these three stocks in the danger zone, he offers a couple of caveats for this type of quantitative analysis generally. One, even when a stock price stops tracking its earnings growth rate, there may be upside in the stock if there is enough momentum behind it. "Valuation is only one-third the picture," says Murphy. "Momentum and growth are the other two." He also says that some stocks -- Cisco, for example -- have always traded at nice premiums to their expected growth rates, though he still sees Cisco as too far above its historical norm.
Finally, Murphy says, while these kinds of charts often serve as early warning signs, stocks can run quite awhile before reality catches up with them.
Reality has finally caught up with Dell.
Please email comments on this analysis to Mark Martinez, metrics editor, at